ServiceMaster Delivers Fourth-Quarter 2018 Revenue Growth of 12 Percent Including 5 Percent Organic Growth at Terminix
- Full-year 2018 Terminix revenue increased 7 percent year-over-year, the highest growth rate since 2002
- Fourth-quarter 2018 Terminix revenue of $396 million increased 12 percent year-over-year
- Fourth-quarter 2018 Terminix organic growth was 5 percent, the highest since 2014
- 2018 consolidated net loss of $41 million, included a $249 million mark-to-market adjustment on investment in frontdoor, inc.
- Full-year 2018 Revenue and Adjusted EBITDA(1) met the high-end and mid-point of guidance, respectively
- Full-year 2019 consolidated revenue guidance of between $2,020 million and $2,050 million
- Full-year 2019 consolidated Adjusted EBITDA guidance of between $435 million and $445 million
MEMPHIS, Tenn. - (BUSINESS WIRE) - February 26, 2019 - ServiceMaster Global Holdings, Inc. (NYSE:SERV), a leading provider of essential services to residential and commercial customers in the termite, pest control, cleaning and restoration markets, today announced unaudited fourth-quarter and full-year 2018 results. On October 1, 2018 we completed the previously announced separation of our American Home Shield business. Concurrent with the effective date of the spin, the American Home Shield segment is reported in discontinued operations for all displayed periods, including prior periods.
For the full year 2018, the company reported a year-over-year revenue increase of 8 percent to $1,900 million and a net loss of $41 million, or $0.30 per share. Net loss was negatively impacted by a $249 million mark-to-market loss on investment in frontdoor, inc. Our post-spin Adjusted EBITDA of $398 million included $33 million of costs which were historically allocated to American Home Shield but are not permitted to be classified as discontinued operations under U.S. GAAP. Our pre-spin Adjusted EBITDA guidance of between $425 and $435 million excluded these $33 million of historically allocated costs. Adjusted net income(2) was $130 million, or $0.95 per share versus $101 million, or $0.74 per share, for the same period in 2017.
For the fourth quarter, the company reported a year-over-year revenue increase of 12 percent to $457 million and net loss of $248 million, or $1.83 per share. Fourth quarter net loss in 2018 was negatively impacted by a $249 million mark-to-market loss on investment in frontdoor, inc. Adjusted EBITDA was $80 million, a year-over-year increase of $6 million and adjusted net income was $26 million, or $0.19 per share versus $10 million, or $0.07 per share, for the same period in 2017.
“Our primary goal in 2018 was to transform our Terminix business and unlock the potential to drive sustainable revenue growth. We are pleased to report that our focused efforts throughout 2018 and strategic initiatives resulted in record revenue at Terminix in the fourth quarter and full year 2018,” said ServiceMaster Chief Executive Officer Nik Varty. “Improvements in pest sales, driven by enhanced marketing initiatives, and stronger start and completion rates drove organic growth of 5 percent during the quarter, including over 7 percent in residential pest for a second consecutive quarter. The strong second half performance in these areas led to full-year organic growth of 2 percent, meeting the high end of expectations we set a year ago. ServiceMaster Brands grew revenue organically 5 percent in the fourth quarter and 9 percent for the full year. We continue to create strong growth by focusing on high-value segments in the cleaning and restoration businesses, with revenue in both commercial restoration and commercial cleaning national accounts up over 20 percent in 2018.”
“While making meaningful strategic investments in the business to drive long-term sustainable growth and shareholder value, the company delivered on its guidance for Adjusted EBITDA for the full year. Our growth strategy is on track for 2019, including major initiatives in the commercial pest and termite businesses, as well as a focus on adjacent opportunities in the cleaning and restoration businesses. We will also remain diligent in our focus on business productivity as we absorb dis-synergies from the successful spin of the American Home Shield business, which increased shareholder value.”
Revenue and Adjusted EBITDA for each reportable segment and Corporate were as follows:
For full wide spreadsheet please go to: https://www.businesswire.com/news/home/20190226005588/en/ServiceMaster-Delivers-Fourth-Quarter-2018-Revenue-Growth-12
Reconciliations of net income to adjusted net income and Adjusted EBITDA, as well as a reconciliation of net cash provided from operating activities from continuing operations to free cash flow, are set forth below in this press release.
Terminix reported 12 percent year-over-year revenue growth in the fourth quarter of 2018, including over 7 percent organic growth in residential pest control services and 33 percent growth from acquisitions in commercial pest control, primarily from the March 2018 Copesan acquisition. This is the second consecutive quarter of over 7 percent organic revenue growth in residential pest control. Organic termite growth in the fourth quarter of 3 percent was aided by approximately $2 million from a one-time acceleration of revenue related to an accounting method change for a bundled pest and termite service offering in order to comply with new revenue recognition standards. This fourth quarter benefit was more than offset in the full year by an initiative to upgrade bait stations for a sub-set of our customers in 2017.
Adjusted EBITDA in the fourth quarter decreased by $6 million year-over-year, partially the result of absorbing $4 million in spin related dis-synergies, $3 million increased sales and marketing expense to drive continued growth, $5 million of selling and administrative expenses from acquisitions and $3 million in other investments in growth, including our partnership with Salesforce to replace legacy operating systems. These costs were partially offset by $14 million in flow-through from higher revenue. The company expects full year 2019 dis-synergies will impact Terminix by $16 million, or $11 million higher than the impact in 2018.
ServiceMaster Brands, previously referred to as Franchise Services Group, reported a $6 million, or 11 percent, year-over-year revenue increase in the fourth quarter of 2018. Organic growth of 5 percent was highlighted by 11 percent growth in commercial cleaning national accounts. Approximately half of the growth related to the recognition of national advertising fund franchisee contributions as revenue pursuant to our adoption of a new accounting rule regarding revenue recognition that took effect on January 1, 2018. Prior to 2018, contributions to the national advertising fund made by our franchisees were treated as an offset to advertising expense. This accounting standards change increased revenue by $3 million but had no impact on Adjusted EBITDA.
Adjusted EBITDA in the fourth quarter was relatively flat with the pass through of higher revenue offset largely by the absorption of $1 million of dis-synergies in the quarter. The company expects full year 2019 dis-synergies will impact ServiceMaster Brands by $3 million, or $2 million higher than the impact in 2018.
Adjusted EBITDA in the fourth quarter increased $3 million from the prior year. The increase is primarily related to continued favorable claims trends related to the company’s workers’ compensation, auto and general liability program as a result of operational improvements in claims management.
Historically Allocated Services
We have historically incurred the cost of certain corporate-level activities that we performed on behalf of our businesses, including American Home Shield, such as executive functions, communications, public relations, finance and accounting, tax, treasury, internal audit, human resources operations and benefits, risk management and insurance, supply management, real estate management, legal, marketing, facilities, information technology and other general corporate support services. The cost of such activities were historically allocated to our segments, including American Home Shield. Certain corporate expenses which were historically allocated to the American Home Shield segment are not permitted to be classified as discontinued operations under U.S. GAAP (“Historically Allocated Services”). Such Historically Allocated Services amounted to $33 million and $44 million for the years ended December 31, 2018, and 2017, respectively.
The costs of Historically Allocated Services which were not transferred to American Home Shield will be borne by our remaining businesses in the future as dis-synergies. We estimate these dis-synergies to be approximately $5 million in 2018 and expect total dis-synergies to be approximately $18 million in 2019.
Share Repurchase Plan
On February 19, 2019, the ServiceMaster Board of Directors approved a three-year extension allowing up to $150 million of repurchases through February 2022. Under the share repurchase program, the company may repurchase shares in accordance with all applicable securities laws and regulations, including Rule 10b-18 of the Securities Exchange Act of 1934, as amended. The extent to which the company repurchases its shares, and the timing and manner of such repurchases, will depend upon a variety of factors, including market conditions, regulatory requirements and other corporate considerations, as determined by the company. The repurchase program may be suspended or discontinued at any time. The company expects to fund the purchases from operating cash flow.
American Home Shield Spin-Off
On October 1, 2018, we completed the previously announced separation of our American Home Shield business (the “Separation”). In connection with the Separation, we distributed 67,781,527 shares of common stock of Frontdoor to our stockholders and retained 16,734,092 shares, or approximately 19.8% of the common stock of frontdoor, inc. This investment is accounted for as an available for sale security and will be marked to market as required by accounting rules. We currently intend to responsibly dispose of all the frontdoor, inc. common stock we retained after the Separation through one or more subsequent exchanges for debt by June 14, 2019, in accordance with terms set forth in a private letter ruling with the Internal Revenue Service (“IRS”) governing the tax-free status of the Separation. The ultimate result of this disposition will be a debt reduction for the company.
The American Home Shield segment is reported in this press release in discontinued operations.
Free Cash Flow
Free cash flow was $187 million for the year ended December 31, 2018 compared to $138 million for the year ended December 31, 2017. Post-spin free cash flow excludes any contributions from the American Home Shield segment, which have been restated as dis-continued operations. The full year 2018 free cash flow to Adjusted EBITDA conversion was 47 percent. The conversion was negatively impacted by Historically Allocated Services and cash interest not permitted to be allocated to discontinued operations under U.S. GAAP, as a result of the American Home Shield spin. The company expects free cash flow to range between 50 to 60 percent of Adjusted EBITDA in 2019.
Full-Year 2019 Outlook
The company expects full-year 2019 revenue to range from $2,020 million to $2,050 million, or an increase of 6 to 8 percent compared to 2018. Organic revenue growth at Terminix is expected to range from 2 to 3 percent. ServiceMaster Brands will continue to focus on high value business verticals and revenue channels such as commercial restoration, healthcare and commercial cleaning national accounts and is expected to drive organic growth in the mid-single digits.
Full-year 2019 Adjusted EBITDA is anticipated between $435 million and $445 million. Terminix is expected to contribute approximately 30 percent incremental margins, less incremental spin dis-synergies of $11 million and $9 million of investments due, in part to, operating duplicate systems during Salesforce implementation. At ServiceMaster Brands, continuing growth in national accounts will increase Adjusted EBITDA but creates slight margin pressure in 2019. We expect a positive inflection point in our year-over-year Adjusted EBITDA margins in the second half of the year as a result of revenue conversion more than offsetting year-over-year dis-synergies and investments in growth.
A reconciliation of the forward-looking 2019 Adjusted EBITDA outlook to net income is not being provided as the company does not currently have sufficient data to accurately estimate the variables and individual adjustments for such reconciliation.
Fourth-Quarter and Full-Year 2018 Earnings Conference Call
The company will provide an update on and discuss the company's operational performance and financial results for the fourth quarter and full year ended December 31, 2018 during a conference call at 8 a.m. central time (9 a.m. eastern time) today, February 26, 2019.
Participants may join this conference call by dialing 800.698.4476 (or international participants, +1.303.223.4363). Additionally, the conference call will be available via webcast. A slide presentation highlighting the company’s results will also be available. To participate via webcast and view the presentation, visit the company’s investor relations home page.
The call will be available for replay until March 28, 2019. To access the replay of this call, please call 800.633.8284 and enter reservation number 21916426 (international participants: +1.402.977.9140, reservation number 21916426). Or you can review the webcast on the company’s investor relations home page.
ServiceMaster Global Holdings, Inc. is a leading provider of termite and pest control, cleaning and restoration services in both the residential and commercial markets, operating through an extensive service network of more than 8,000 company-owned locations and franchise and license agreements. The company’s portfolio of well-recognized brands includes AmeriSpec (home inspections), Copesan (commercial national accounts pest management), Furniture Medic (cabinet and furniture repair), Merry Maids (residential cleaning), ServiceMaster Clean (commercial cleaning), ServiceMaster Restore (restoration and reconstruction), Terminix (termite and pest control), and Terminix Commercial (commercial termite and pest control). The company is headquartered in Memphis, Tenn. Go to www.servicemaster.com for more information about ServiceMaster or follow the company at twitter.com/ServiceMaster or Facebook.com/ServiceMaster.
Information Regarding Forward-Looking Statements
This press release contains forward-looking statements and cautionary statements, including 2019 revenue and Adjusted EBITDA outlook and organic revenue growth projections. Forward-looking statements can be identified by the use of forward-looking terms such as “believes,” “expects,” “may,” “will,” “shall,” “should,” “would,” “could,” “seeks,” “aims,” “projects,” “is optimistic,” “intends,” “plans,” “estimates,” “anticipates” or other comparable terms. Forward-looking statements are subject to known and unknown risks and uncertainties, many of which may be beyond our control, including, without limitation, the risks and uncertainties discussed in the “Risk Factors” and “Information Regarding Forward-Looking Statements” sections in the company’s reports filed with the U.S. Securities and Exchange Commission. Such risks, uncertainties and changes in circumstances include, but are not limited to: lawsuits, enforcement actions and other claims by third parties or governmental authorities; compliance with, or violation of environmental health and safety laws and regulations; the effects of our substantial indebtedness; changes in interest rates, because a significant portion of our indebtedness bears interest at variable rates; weakening general economic conditions; weather conditions and seasonality; the success of our business strategies, and costs associated with restructuring initiatives. We caution you that forward-looking statements are not guarantees of future performance or outcomes and that actual performance and outcomes, including, without limitation, our actual results of operations, financial condition and liquidity, and the development of the market segments in which we operate, may differ materially from those made in or suggested by the forward-looking statements contained in this press release. The company assumes no obligation to update the information contained herein, which speaks only as of the date hereof.
Non-GAAP Financial Measures
This press release contains certain non-GAAP financial measures. Non-GAAP measures should not be considered as an alternative to GAAP financial measures. Non-GAAP measures may not be calculated like or comparable to similarly titled measures of other companies. See non-GAAP reconciliations below in this press release for a reconciliation of these measures to the most directly comparable GAAP financial measures. Adjusted EBITDA, adjusted net income, adjusted earnings per share and free cash flow are not measurements of the company’s financial performance under GAAP and should not be considered as an alternative to net income, net cash provided by operating activities from continuing operations or any other performance or liquidity measures derived in accordance with GAAP. Management uses these non-GAAP financial measures to facilitate operating performance and liquidity comparisons, as applicable, from period to period. We believe these non-GAAP financial measures are useful for investors, analysts and other interested parties as they facilitate company-to-company operating performance and liquidity comparisons, as applicable, by excluding potential differences caused by variations in capital structures, taxation, the age and book depreciation of facilities and equipment, restructuring initiatives and equity-based, long-term incentive plans.
(1) Adjusted EBITDA is defined as net (loss) income before: depreciation and amortization expense; acquisition-related costs; 401(k) Plan corrective contribution; fumigation related matters; insurance reserve adjustment; non-cash stock-based compensation expense; restructuring charges; non-cash impairment of software and other related costs; mark-to-market loss on investment in frontdoor, inc.; (gain) loss from discontinued operations, net of income taxes; provision (benefit) for income taxes; loss on extinguishment of debt and interest expense. The company’s definition of Adjusted EBITDA may not be comparable to similarly titled measures of other companies.
(2) Adjusted net income is defined as net (loss) income before: amortization expense; 401(k) Plan corrective contribution; fumigation related matters; insurance reserve adjustment; restructuring charges; acquisition-related costs; mark-to-market loss on investment in frontdoor, inc.; impairment of software and other related costs; (gain) loss from discontinued operations, net of income taxes; loss on extinguishment of debt; and the tax impact of the aforementioned adjustments and the impact of tax law change on deferred taxes. The company’s definition of adjusted net income may not be comparable to similarly titled measures of other companies. Adjusted earnings per share is calculated as adjusted net income divided by the weighted-average diluted common shares outstanding.
(3) Free cash flow is defined as net cash provided from operating activities from continuing operations less property additions, net of government grant fundings for property additions.
(4) Corporate includes the unallocated expenses of our corporate functions.
For full spreadsheet please go to: https://www.businesswire.com/news/home/20190226005588/en/ServiceMaster-Delivers-Fourth-Quarter-2018-Revenue-Growth-12
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